If innovation really counts

I watched a debate recently on innovation on Q&A on the ABC that descended into an expert-free, free-for-all on NBN, where a quantum physicist had the ‘best’ opinion – where the desire for people to have the nation subsidise their internet connection came through loud and clear. I do not like the NBN, it was foisted onto us by dishonesty and naivety, it has proved very hard to unpick but there is maybe a way we can turn it to the good for our economic future. Before we try that – how about we all try to understand it ?

How much do we really care for innovation in Australia? I hope you can continue reading to the end as this is really important, there is tech and economics in this as there has to be. There is no quick understanding of the issues around NBN but if people are to have a debate they need to be better informed and as a nation we need a goal for such an undertaking as the NBN. If we are going to pour tens of billions of dollars into this maybe we should be even braver yet – stay tuned to the end please.

If the goal is ‘to have fast internet’ then we are missing the bigger picture. The NBN in Australia needs to be turned into a network that will ensure that innovation and enterprise in Australia is that well positioned that we will reap the benefits of it over the decades to come. No current NBN proposal from either side does this. The NBN we are getting will not allow that – it needs to change. And none of this has to do with fibre versus copper, vendor, Telstra or anything else.

Journalists who, in the same the article, decry that they do not understand this topic due to its technical nature but then bay for the NBN construction without any clue or understanding into what is being forced onto us carry much of the blame for the state of the debate. This is a complicated topic and unless you get it then you actually shouldn’t have an opinion – not when tens of billions are at stake not to mention the shape of the most important infrastructure we are yet to have. There are too many parts to this puzzle to pick and choose which bits you want to understand. There is no easy button on this one. You need to understand the technology and the ramifications of the new competitive landscape if you are to have a voice in this debate. Simple ‘fibre versus copper’ sound bites have led us into where we are today.

There are many other things you can do to fix competitive telecoms in Australia before you bring back a monopoly owner, things like straightening out land access for network build to prevent gaming including road, rail, power utility carve outs; regulate facilities access and similar competitive regulations to prevent richer carriers gaming them; undertake a re-costing exercise of duct and facilities access; the number and location of network interconnection points, concentrating on outside metro areas where service levels and choices are diabolical – but given some recent press and a looming election campaign I will stick to access related issues around NBN.

I encourage people who want to be informed to research these topics – where research isn’t reading the blogs of pundits! I am out of the telco game and have no dog in this fight – I just want a real debate fuelled by facts where experts get to supply the facts, not politicians, theorists, academics and those NBN fans who want ‘NBN or bust’ because ‘NBN and bust’ is an option here.

Before you start you need to know a few things about networks. If you own a network that has a certain amount of capacity – say 100mbit/sec then the cost to operate that network (not the price charged to the user) is materially the same between 1% of utilisation and near 100% utilisation.

Before NBN, a broadband provider could build a network out, connect up customers based on relevant technology for their product offering, the technology would vary based on local issues and market factors. But the provider would make its own investment decision, own the network and have a fixed cost to operate regardless if it operated at 1% or 95%. The cost to service the customer for access was fixed, the only time you really started adding incremental costs was when you had to purchase capacity from outside your own network (international Internet capacity or networks you didn’t own for example, this term is transiting off network).

What’s more, adding capacity later is usually cheaper than the original construction because telecommunications equipment has reduced in price per unit of capacity in line with Moore’s Law for the last thirty years. There is no sign of this slowing in the foreseeable future.

Network ownership is great as the upside leverage is huge. So why price in scarcity when it does not exist?

If you build and own a network it has a fixed cost to operate – so why would you bother to set speed hurdles for customers to access it? Sure there are some contention issues in the network – the FTTH network has about 80Mbit/sec to each house[i] – not bad; where you have an xDSL last few hundred metre FTTN solution there is no sharing but the headline speed may be lower[ii]. The point is – why do we have access product speeds such as 12/1, 25/5, 50/20, 100/40 when the network operational cost for everybody to run at top speed (up to 80Mbit/sec on FTTH) does not increase[iii]?

People will say a few things on this – if you use more it must cost more? Wrong. We are just talking about using the NBN here – not transiting off it and using the internet in general where real expenses add up pretty fast. This is just about going from your home on NBN to the edge where NBN hands you off to your ISP. There is zero incremental cost in this if it is engineered correctly[iii] – it sounds illogical but it does not cost any more if it stays on network. If we can keep all of the network traffic inside of Australia there are further cost and economic benefits as well – see interconnection points further down.

Other will say – but it should cost you more – if you use it more then you should pay more – that is just fair right? Why? I pay one charge to use the road for my car – registration, a little more through petrol but I can regulate that through fuel efficiency choices. I do not get charged more if I travel at 100km/hr instead of 85km/hr, nor do I get charged more if I fill all 5 seats instead of just one. Why don’t we have this approach to the network ? Why can’t we view NBN more as a road network in the way it is paid for, used and charged for?

The next mind warping feature NBN has baked into it is the Connectivity Virtual Circuit charge – the CVC. This is a fee levied onto your ISP to connect to NBN concentration points, it is a fee charged per megabit per sec (Mbit/sec) per month and currently stands at $17.50 which in volume can come down[iv] to $11 (if you average 1.5M per user per connection point under a current 2 year trial). ISPs gets to aggregate this across all users at a connection point but if you use 1mbit/sec for one month (320G downloaded in one month is 1Mbit/sec) then you will cost your ISP at least $11 and generally around $16 with various standard volume discounts[v]. They will have to recoup that or go broke – economics. Right now, under a temporary fast start plan each ISP gets 150Mbit/sec CVC thrown in, this has led to the cramming of users into this free allocation, it doesn’t take very many users to overflow 150Mbit/sec – 2 technically who enjoy a 100Mbit/sec home connection. This is temporary.

Under the previous, non NBN, competitively owned setup this did not exist at all. Operational expense was present in the form of aggregated and average fixed costs to operate a network but the operator got to set those costs through investment decisions in many cases and a competitive market for backhaul[vi]. It would come in costing a lot less on average and it would be fixed and known, this cost to the ISP was closer to $1 per month[vii] if you were to calculate it.

CVC was included in order to induce a commercial return to ensure the cost of NBN stayed off the budget as it was a ‘commercial’ return – and that is the hard part about changing it – monkey with that and the build cost goes onto the budget. Mind you we are still borrowing and paying interest on NBN capital – we just ignore it for the most part as if it is irrelevant. Magic puddings taste great.

Netflix, Stan and others have brought the realities of the broken NBN model into clear focus. No longer is it if we will use heaps of data across a modern broadband network because we are, every day we seem to get more ways to view, download, post, update etc – more data usage is a given. What does 1Mbit/sec mean – it means 320 gigabytes per month if you use it 100% flat out every last second of the month. For the most part we do not use our internet connections that way but the rise over the last decade of the Silicon Cockroach (a term invented by John Sidgmore[viii]) whereby things, programs, software will, at all hours of the day and night tend to our needs has increased the average ‘noise floor’ of home minimum usage at all hours of the day. Think of your iCloud, Drobox and other similar things constantly syncing up files or transferring our sleeping/walking habits etc to the cloud. Lay on top of that the multiple devices we own, the rich media that we now want streamed (and are finally being allowed to acquire legally) in ever increasing numbers, to ever more rooms in the house… we need the speed a modern broadband network can offer and we need the ability to move traffic over it at an economically rational cost to us. Having a network charge us at least $11 extra for every new increment of traffic/speed is not that network.

For every 320G of extra data you need 1Mbit/sec ($11 to $17.50 per month under NBN), if you download that faster than every 30 days you need more. It is also true that not everybody uses all of that speed all of the time and some efficiencies can come due to the distribution of usage patterns but, and the introduction of Netflix is testament to this, users are starting to use more and more. We get around this currently by the data quota – how much we are allowed to download before some form of extra tariff or some technical means of speed limits come into place. If the network costs no more to operate then why charge more to the end user, why do we ration a service that has no coupled cost for additional use ?

Now for the really innovative bit.

Open the ports, remove restrictions – give us all the highest speed the network will allow for – not the solution the budget needs to hide the cost from us. Opening the ports means no speed tiers (you connect at maximum speed for your technology) and no data usage charge (no CVC) therefore no quotas for downloads. Will it cost more to build? – Not materially, if at all[ix]. Will it cost more to operate? – No. Will it charge customers less? – No it shouldn’t, if the requirement to meet NBN Co operational expenses is not coupled to usage of the network (NBN expense does not materially rise for usage) it can generate the same revenue but allow end users to grow their Internet use so Australia can be more productive after its introduction, don’t link price to variable usage. Will customers use it more? – Yes, and isn’t that the idea. Remember that the way the NBN tariffs are currently structured means that if you have a 6 seat vehicle you pay more than a 5 seat vehicle and if you drive that vehicle at 100km/hr instead of 80km/hr you also pay more.

This is for using the NBN only – as soon as you transit off NBN[x] there will be external charges but this would also give a non-incrementally charged data path between every Australian on NBN. This is how it essentially works now under a non NBN model – an ISP has a fixed low cost to operate their network but a high variable (in many cases) cost as soon as traffic goes to another network.

Without artificial speed and data transfer constraints the NBN would be a world leading innovation fostering tool that would see us actually be able to hold our heads high in these stakes, it would be the equivalent of a 4 lane road on every street with accompanying highways to handle the load – a revolution.

While we are at we need to fix interconnection – this is how ISPs in Australia exchange traffic between themselves, sometime separated by mere metres in a data centre, many times this can cost more than to buy internet access from overseas – ridiculous. Through a small enquiry and regulatory instrument the government could make modification to carrier licences and service provider conditions to mandate that they interconnect and exchange traffic on a more equitable basis. This has improved over the years but needs to be streets better. As part of a license to connect customers to the Internet there needs to be a mandate to interconnect more rationally – maybe as a requirement to connect to NBN as an ISP. If this is done right we will also assist in the building of more local content for these NBN wide open customer connections to consume.

Why is it we can have a Hume or Bruce Highway without per kilometre per hour levies, kilometre travelled fees or toll gates that restrict shape, colour and speed of vehicle. We seem to be content to understand that the cost of the road will be paid for in time with an increase is economic activity, community benefits and subsequent lift in the revenue base – we do not restrict their use because that makes no sense. We do tax vehicles through registration and fuel excise but the spending on roads has been decoupled from the revenue for some years and the cost to build them does squarely sit on the budget. When the amazing positive upside of an NBN style network is actually clear to all in the debate why don’t we take a highways style approach?

Many dangers lie ahead with proceeding on the NBN even on the terms I am proposing, let’s not see a repeat of the regulated return on asset shambles that have dogged the power industry, where gold plating is seen as a way to increase the asset value and therefore allowing for a greater actual revenue take based on the asset value. Putting a network in the hands of a monopoly provider WILL lead to monopoly behaviour, fibre networks will fail and need repair, their failure mode is different to copper but if the owner of the NBN displays as much care for the asset as Telstra showed for its copper network then it will break and this problem will just be kicked down the road.

There are real risks with this more utopian style NBN but the reward can be amazing, if we build it for innovation instead of as a way to win an election then we can start to realise the benefits of what could be a truly world leading network.

NBN is currently about the monopolisation of the telecommunications access networks in Australia, it is the emasculation of facilities based competition and in return we are getting the world’s most expensive and commercially inflexible network – if we are truly going to reregulate ourselves into this corner let’s at least make the prize worth the pain.

If the answer is to build a new monopoly – did we really understand the issues and then ask the right question?

[i] FTTH based on a 2.5G GPON drop, 32 homes using 2.5G equates to about 80Mbit/sec each

[v] As of March 2016 a mbit/sec/month of internet from LA to Sydney cost less than $5/mbit/sec/month – under NBN that same traffic transmitted from your local NBN exchange will cost between $11 and $17.50!

[vi] Backhaul is the carriage of data between different location on a network

[vii] Highly depend on user penetration, technology choice and other factors and could include a variety of other costs such as end customer access, depreciation for build, exchange access costs and many others.

[ix] This will depend if intra NBN trunk routes need to be re-engineered to remove contention in the core

[x] Transit is when your internet data leaves one network to go to another, in the NBN context when your data leaves NBN and goes overseas to (say) Facebook, it would also mean when you exchange data between to an Optus user if you are a Telstra user.

Stephen Baxter (@sbxr) is a telecoms and Internet Entrepreneur with over 20 years actual and successful experience in ISP and telecommunications companies, he foundered early Internet Service Provider SE Net; co-foundered PIPE Networks – a wholesale provider of data centre, internet interconnection, backhaul fibre networks, submarine fibre networks and more; he worked with Google Inc in California building multi terabit networks across North America before becoming an early stage investor in tech startups and foundered Brisbane tech startup co-working space River City Labs, foundered and underwrite the Startup Catalyst program; he has been on the boards of listed carriers including Vocus Telecoms; he has been heavily involved in the early days or founding of numerous industry groups and forums such as the South Australian Internet Association, SAIX, ADNA, AuDA, INTIAA, IIA, AusBone and AusNOG.

[I want to get across some core concepts and realities in this article but I have deliberately tried to mainstream many technical concepts, probably not well enough but too much for some, to help the reader so I apologise to my former industry colleagues for some parts of this, I thank JSL and others for the proof read – all mistakes are mine not theirs]